Martineau: Sloppy regulation opened door to IRS abuse

Tuesday

May 28, 2013 at 12:01 AM

By Robert J. Martineau, Guest Columnist

One of the hot political topics in Washington and across the nation is the misconduct of some Internal Revenue Service officials and employees in targeting conservative groups seeking tax-exempt status under the tax code. The misconduct has received the universal condemnation it deserves from virtually everyone, including President Obama and representatives of both parties.

The Herald-Tribune has editorially joined the criticism and called for further investigations to find out who engaged in the misconduct and why. It also called for an examination of "the ambiguity in federal law and IRS guidelines for determining whether an organization deserves" tax-exempt status.

As important as it is to discipline those who discriminatorily applied the law, it is even more important to ascertain whether existing law is unclear and, if so, to clarify it.

To answer this question it is necessary to examine the history of the code provision in question, 26 U.S.C. section 501(c)(4)(A), and the Treasury regulations interpreting it. This will show whether the law itself is ambiguous (or, more correctly, unclear) or whether the IRS has misinterpreted and misapplied this provision over the years, thus allowing IRS employees to target specific applicants for arbitrarily overzealous examination.

Shortly after the adoption in 1913 of the 16th Amendment to the Constitution, allowing the federal government to tax incomes, Congress enacted the Internal Revenue Code. It included a tax exemption for "any civic league or organization not organized for profit, but operated exclusively for the promotion of social welfare."

"Operated exclusively for the promotion of social welfare" was retained in every subsequent recodification of the law. The regulations that implemented this statute since 1924 restricted the exemption to organizations "operated exclusively for purposes beneficial to the community as a whole."

In 1954, Congress completely rewrote the tax code. Congress continued, however, the tax exemption for civic leagues or organizations that operated exclusively for the promotion of social welfare in section 501(c)(4)(A). The IRS regulations adopted in 1954 also retained the "operated exclusively" language.

In 1959, however, the Treasury Department adopted another regulation that defined the phrase "operated exclusively for the promotion of social welfare" in the tax code. The regulation stated, "An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community."

By this regulation, the "operated exclusively" requirement imposed by Congress became "primarily engaged" under the regulation. The statute itself is a model of clarity. The regulation, on the other hand, is model of sloppy drafting, opening up the door to the inconsistent and unequal treatment of applicants.

This change had two bad effects. First, it amended the statute by administrative fiat, something not within the power of an administrative agency. Second, it gave the IRS the discretion to decide what percentage of an organization's activities could be devoted to something other than social welfare.

This is a very flexible standard that opened the door for unequal treatment of organizations seeking tax-exempt status, as demonstrated by the IRS' singling out organizations with conservative- sounding names.

The problem here is not that the tax code is unclear (or ambiguous). The problem is that the Treasury regulation supposedly applying the tax code completely changed its meaning.

The Treasury Department has indicated an unwillingness to change its regulation on the ground that it has been in effect for more than 50 years. It is thus up to Congress to solve this problem. It can do so in two ways. One is to force the Treasury Department to revise its regulation so that it is in accord with the tax code. The other is to amend the tax code to provide that "exclusively" does not mean "primarily" but requires a minimum of 99 percent of the applicant's activities.

Either of these congressional actions will deny the IRS discretion in the treatment of tax-exempt applicants.

Even more important, they will prevent a tax-exempt organization from engaging in political activities, activities clearly not permitted by the tax code since the initial adoption of the social welfare exemption in 1913.

Robert J. Martineau of Nokomis is Distinguished Research Professor of Law Emeritus, University of Cincinnati. He is the author or co-author of three books on drafting and interpreting statutes and rules.